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Macy's (M) Up 10.4% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Macy's (M). Shares have added about 10.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Macy's due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Macy’s Beats on Q3 Earnings, Cuts View

After a miss in the second quarter of fiscal 2019, Macy’s, Inc. reported a positive earnings surprise in the third quarter. However, net sales fell short of the Zacks Consensus Estimate for the fourth quarter in a row. Moreover, both the top and the bottom line continued to decline year over year. Also, comparable sales slid after seven straight quarters of growth. Following the results, management trimmed fiscal sales and earnings guidance. These were enough to dampen investor sentiments.

Let’s Delve Deep

Macy’s posted third-quarter adjusted earnings of 7 cents a share that surpassed the Zacks Consensus Estimate of 1 cent. However, the quarterly earnings fell sharply from 27 cents reported in the year-ago period.

The department store chain generated net sales of $5,173 million that missed the Zacks Consensus Estimate of $5,310 million and decreased 4.3% year over year. Credit card revenues decreased 1.1% to $183 million. Nonetheless, management expects fourth-quarter sales performance to be sequentially better based on the company’s holiday plans.

Comparable sales (comps) on an owned plus licensed basis fell 3.5%, while on an owned basis, the metric decreased 3.9%.

Management highlighted that late arrival of cold weather, softness in international tourism and lower-than-expected performance in lower tier malls hurt the top line.

The company registered strong performance in mattresses, fine jewelry, fragrances, dresses, men's active and men's tailored. However, softness was seen in women’s and men sportswear, especially the cold weather items, handbag, housewares and furniture.

Gross margin contracted 30 basis points to 40% during the quarter. Macy’s expects gross margin to be moderately down for the fiscal year. Adjusted EBITDA declined 20.1% to $325 million, while adjusted EBITDA margin contracted 120 basis points to 6.3%.

Other Financial Aspects

Macy’s ended the quarter with cash and cash equivalents of $301 million, long-term debt of $4,677 million, and shareholders’ equity of $6,057 million.

Management incurred capital expenditures of approximately $812 million for the 39 weeks ended on November 2.

FY19 View

Following third-quarter sales performance, Macy’s now anticipates net sales decline of 2-2.5% with comps on an owned plus licensed basis to fall 1-1.5% for fiscal 2019. Comps on an owned basis are projected to be roughly 20 basis points below comps on an owned plus licensed basis.

The company had earlier projected net sales to be roughly flat with both comps on an owned plus licensed basis and comps on an owned basis projected to be flat to up 1%.

Management now envisions adjusted earnings between $2.57 and $2.77, down from the prior view of $2.85-$3.05 per share for fiscal 2019. The company had reported earnings of $4.18 in fiscal 2018.

How Have Estimates Been Moving Since Then?

Fresh estimates followed a downward path over the past two months. The consensus estimate has shifted -11.59% due to these changes.

VGM Scores

At this time, Macy's has a poor Growth Score of F, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Macy's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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